72
Module 6
Revisiting Cash Flow
Charleigh, Inc.
Income Statement
For the Year Ended December 31, 2016
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses
Salary Expense
Insurance Expense
Bad Debt Expense
Depreciation Expense
Total Operating Expenses
Operating Income
Other Revenues & <Expenses>
Interest Expense
Gain on sale of Equipment
Net Other Revenue (Expense)
Taxable Income
Tax Expense
Net Income
Earnings Per Share
Charleigh, Inc.
Balance Sheet
December 31,
$ 480,000
240,000
240,000
$124,000
12,000
300
2,400
138,700
101,300
(4,200)
500
(3,700)
97,600
29, 280
$68,320
$22.57
2016
Assets
Current Assets
Cash
$
Accounts Receivable
Allowance for
Doubtful Accounts
Net Accounts Receivable
Inventory
Prepaid Insurance
Total Current Assets
Property and Equipment
Furniture & Fixtures
Less: Accumulated
Depreciation
Net Property and Equipment
Other Assets
Patents
Total Assets
2015
26,200
45,000
$ 16,800
38,000
1,200
43,800
10,000
_ 100
80,100
1,000
37,000
11,000
______
64,800
186,000
130,000
(19,400)
166,600
(20,000)
110,000
500
100
$247,200
$174,900
Liabilities
Current Liabilities
Accounts Payable
$ 17,000 $ 2,000
Salaries Payable
1,000
Taxes Payable
12,100
13,120
Advertising Payable
100
Current Portion of
Long-term Debt
10,000
10,000
Total Current Liabilities
40,100
25,220
Long-Term Debt
Note Payable-Bank
50,000
60,000
Total Long-Term Debt
50,000
60,000
Total Liabilities
90,100
85,220
Owners’ Equity
Common Stock ($1 par)
3,100
3,000
Capital in Excess Par
30,000
21,000
Retained Earnings
124,000
65,680
Total Owners’ Equity
157,100
89,680
Total Liabilities
& Owners’ Equity
$247,200
$174,900
On June 30, the company sold a piece of equipment which had cost $3,500, had accumulated depreciation of
$3,000 for $1,000. The Note Payable-Bank is payable at $10,000 per year plus interest at 6% on December
31 of each year. The company wrote off one account which owed $100 during the year. The company paid
a dividend during the year. On June 30, the company exchanges 10 shares of stock for equipment worth
$1,000. The additional common stock, other that traded for equipment was sold on October 1, 2016 for
cash. The additional equipment, other than that exchanged for stock, was purchased for cash.
73
Do Charleigh Cash Flow using the indirect
74
Charleigh, Inc.
Income Statement
For the Year Ended December 31, 2016
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses
Salary Expense
Insurance Expense
Bad Debt Expense
Depreciation Expense
Total Operating Expenses
Operating Income
Other Revenues & <Expenses>
Interest Expense
Gain on sale of Equipment
Net Other Revenue (Expense)
Taxable Income
Tax Expense
Net Income
Earnings Per Share
Charleigh, Inc.
Balance Sheet
December 31,
$ 480,000
240,000
240,000
$124,000
12,000
300
2,400
138,700
101,300
(4,200)
500
(3,700)
97,600
29, 280
$68,320
$22.57
2016
Assets
Current Assets
Cash
$
Accounts Receivable
Allowance for
Doubtful Accounts
Net Accounts Receivable
Inventory
Prepaid Insurance
Total Current Assets
Property and Equipment
Furniture & Fixtures
Less: Accumulated
Depreciation
Net Property and Equipment
Other Assets
Patents
Total Assets
2015
26,200
45,000
$ 16,800
38,000
1,200
43,800
10,000
_ 100
80,100
1,000
37,000
11,000
______
64,800
186,000
130,000
(19,400)
166,600
(20,000)
110,000
500
100
$247,200
$174,900
Liabilities
Current Liabilities
Accounts Payable
$ 17,000 $ 2,000
Salaries Payable
1,000
Taxes Payable
12,100
13,120
Advertising Payable
100
Current Portion of
Long-term Debt
10,000
10,000
Total Current Liabilities
40,100
25,220
Long-Term Debt
Note Payable-Bank
50,000
60,000
Total Long-Term Debt
50,000
60,000
Total Liabilities
90,100
85,220
Owners’ Equity
Common Stock ($1 par)
3,100
3,000
Capital in Excess Par
30,000
21,000
Retained Earnings
124,000
65,680
Total Owners’ Equity
157,100
89,680
Total Liabilities
& Owners’ Equity
$247,200
$174,900
On June 30, the company sold a piece of equipment which had cost $3,500, had accumulated depreciation of
$3,000 for $1,000. The Note Payable-Bank is payable at $10,000 per year plus interest at 6% on December
31 of each year. The company wrote off one account which owed $100 during the year. The company paid
a dividend during the year. On June 30, the company exchanges 10 shares of stock for equipment worth
$1,000. The additional common stock, other that traded for equipment was sold on October 1, 2016 for
cash. The additional equipment, other than that exchanged for stock, was purchased for cash.
75
Do Charleigh Cash Flow using the Direct Method
76
From the following information for Molly’s Munchies, prepare a Statement of Cash Flows for the
year ended December 31, 2016 using the both the direct and the indirect method.
Cash
Accounts Receivable
Inventory
Prepaid Insurance
Equipment
Accumulated Depreciation
Land
Security Deposits
Accounts Payable
Wages Payable
Rent Payable
Interest Payable
Taxes Payable
Contract Payable
Note Payable
Common Stock ($1 each)
Paid In Capital
Retained Earnings
Sales
Cost of Goods Sold
Wage Expense
Rent Expense
Office Expenses
Depreciation Expense
Advertising Expense
Insurance Expense
Interest Expense
Loss on Sale of Equipment
Income Tax Expense
Balance
12/31/16
Balance
12/31/15
93,575
68,000
70,000
500
440,000
65,000
40,000
12,000
35,000
6,500
7,500
6,000
3,000
41,075
120,000
60,000
240,000
140,000
1,200,000
575,000
260,000
24,000
70,000
60,000
9,650
9,000
15,350
(4,000)
52,000
20,000
35,000
90,000
3,000
270,000
20,000
10,000
30,000
10,000
6,000
7,000
5,000
140,000
32,000
128,000
50,000
$50,000 of the equipment was acquired on June 30, 2016 by paying by putting $5,000 down and signing
a contract to pay the rest in 10 equal semi-annual payments which include interest at 6% (annual rate).
The first payment was made on December 31, 2016. A piece of equipment was sold during the year that
had an original cost of $20,000 and accumulated depreciation of $15,000. The rest of the equipment
purchased was purchased for cash. The land was purchased by issuing 5,000 shares of stock and
paying $15,000 cash. The additional common stock was sold on June 30, 2016. All the rest of the
equipment and the land purchased during the year was purchased for cash. The retained earnings
balance for both years is after all closing entries have been made. The Note Payable requires
payments of $20,000 principal plus interest at 10% on June 30th of each year.
77
Do a Cash Flow for Molly’s using the indirect method
78
From the following information for Molly’s Munchies, prepare a Statement of Cash Flows for the
year ended December 31, 2016 using the both the direct and the indirect method.
Cash
Accounts Receivable
Inventory
Prepaid Insurance
Equipment
Accumulated Depreciation
Land
Security Deposits
Accounts Payable
Wages Payable
Rent Payable
Interest Payable
Taxes Payable
Contract Payable
Note Payable
Common Stock ($1 each)
Paid In Capital
Retained Earnings
Sales
Cost of Goods Sold
Wage Expense
Rent Expense
Office Expenses
Depreciation Expense
Advertising Expense
Insurance Expense
Interest Expense
Loss on Sale of Equipment
Income Tax Expense
Balance
12/31/16
Balance
12/31/15
93,575
68,000
70,000
500
440,000
65,000
40,000
12,000
35,000
6,500
7,500
6,000
3,000
41,075
120,000
60,000
240,000
140,000
1,200,000
575,000
260,000
24,000
70,000
60,000
9,650
9,000
15,350
(4,000)
52,000
20,000
35,000
90,000
3,000
270,000
20,000
10,000
30,000
10,000
6,000
7,000
5,000
140,000
32,000
128,000
50,000
$50,000 of the equipment was acquired on June 30, 2016 by paying by putting $5,000 down and signing
a contract to pay the rest in 10 equal semi-annual payments which include interest at 6% (annual rate).
The first payment was made on December 31, 2016. A piece of equipment was sold during the year that
had an original cost of $20,000 and accumulated depreciation of $15,000. The rest of the equipment
purchased was purchased for cash. The land was purchased by issuing 5,000 shares of stock and
paying $15,000 cash. The additional common stock was sold on June 30, 2016. All the rest of the
equipment and the land purchased during the year was purchased for cash. The retained earnings
balance for both years is after all closing entries have been made. The Note Payable requires
payments of $20,000 principal plus interest at 10% on June 30th of each year.
79
Do Molly’s using the Direct Method
80
Module 6 Homework
BobKat Enterprises, Inc.
Income Statement
For the Year Ended December 31, 2015
Sales
$ 900,000
Cost of Goods Sold
400,000
Gross Margin
500,000
Operating Expenses
Wage Expense
$250,000
Rent Expense
36,000
Depreciation Expense
30,000
Bad Debt Expense
18,000
Total Operating Expenses
334,000
Operating Income
166,000
Other Revenues & <Expenses>
Interest Expense
< 16,000>
Taxable Income
150,000
Tax Expense
45,000
Net Income
$ 105,000
EPS
2015
$ 1.95
BobKat Enterprises, Inc.
Balance Sheet
December 31,
2014
Assets
Current Assets
Cash
$ 140,000
$ 170,000
Accounts Receivable
80,000
85,000
Less: Allowance for
Doubtful Accounts (10,000)
(5,000)
Net Accounts Receivable
70,000
80,000
Inventory
90,000
70,000
Total Current Assets
300,000
320,000
Property and Equipment
Equipment
420,000
340,000
Less: Accumulated
Depreciation
( 90,000) ( 60,000)
Net Property & Equipment 330,000
280,000
Other Assets
Security Deposit
10,000
10,000
Total Assets
$ 640,000
$ 610,000
Liabilities
Current Liabilities
Accounts Payable
Wages payable
Interest Payable
Taxes Payable
Total Current Liabilities
Long-Term Debt
Note Payable
Total Liabilities
2015
2014
$ 78,000 $ 149,000
9,000
8,000
3,000
5,000
12,000
10,000
102,000
172,000
100,000
202,000
100,000
272,000
Owners’ Equity
Common Stock ($1 per share) 60,000
50,000
Retained Earnings
378,000 288,000
Total Owners’ Equity
438,000
338,000
Total Liabilities and
Owners’ Equity
$ 640,000 $ 610,000
Some of the equipment was acquired on June 30, 2015 by exchanging 5,000 shares of common stock
worth $5,000. The additional shares of common stock were issued on September 30, 2015. The Note
Payable is interest only at 10% and will be paid in 2020. The company did not sell any equipment during
the year. The retained earnings balance for both years is after all closing entries have been made.
81
Problem Sheet
Doorod Dud’s, Inc.
Income Statement
For the Year Ended December 31, 2016
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses
Wage Expense
$290,000
Rent Expense
36,000
Depreciation Expense
30,000
Bad Debt Expense
8,000
Total Operating Expenses
Operating Income
Other Revenues & <Expenses>
Interest Expense
Taxable Income
Tax Expense
Net Income
EPS
$ 900,000
400,000
500,000
364,000
136,000
(6,000)
130,000
39,000
$ 91,000
$ 1.65
Doorod Dud’s, Inc.
Balance Sheet
December 31,
2016
2015
Assets
Current Assets
Cash
$ 130,000
$ 170,000
Accounts Receivable
80,000
85,000
Less: Allowance for
Doubtful Accounts (10,000)
(5,000)
Net Accounts Receivable
70,000
80,000
Inventory
90,000
70,000
Total Current Assets
290,000
320,000
Property and Equipment
Equipment
420,000
340,000
Less: Accumulated
Depreciation
( 90,000) ( 60,000)
Net Property & Equipment 330,000
280,000
Other Assets
Security Deposit
10,000
10,000
Total Assets
$ 630,000
$ 610,000
2016
Liabilities
Current Liabilities
Accounts Payable
Wages payable
Interest Payable
Taxes Payable
Total Current Liabilities
Long-Term Debt
Note Payable
Total Liabilities
Owners’ Equity
Common Stock ($1 Par)
Paid In Capital
Retained Earnings
Total Owners’ Equity
Total Liabilities and
Owners’ Equity
2015
$ 78,000 $ 139,000
9,000
8,000
3,000
5,000
12,000
10,000
102,000
162,000
100,000
202,000
110,000
272,000
6,000
54,000
368,000
428,000
5,000
45,000
288,000
338,000
$ 630,000 $ 610,000
Some of the equipment was acquired on March 30, 2016 by exchanging 500 shares of common
stock worth $5,000. The additional shares of common stock were issued on September 30, 2016.
The Note Payable at 10,000 per year plus interest at 10%. The company did not sell any equipment
during the year. The retained earnings balance for both years is after all closing entries have been
made.
82
11. Which of the following is NOT a category on the statement of cash flows?
Cash flow from:
A) sales.
B) financing.
C) operations.
13. Which of the following does NOT represent a cash flow relating to operating activity?
A) Cash received from customers.
B) Dividends paid to stockholders.
C) Interest paid to bondholders.
14.
Field Inc. owns a piece of specialized machinery. The original cost of the machinery was
$500,000 and to date there is an accumulated depreciation balance of $140,000. Which of the
following will Field recognize on its income statement if it sells the machinery for $400,000?
A) Gain of $40,000.
B) Loss of $100,000.
C) Loss of $360,000
15. Hersi Company’s fixed asset footnote included the following:
During 2015, Hersi sold machinery for a gain of $100,000. The machinery had an original cost of
$500,000 and its accumulated depreciation was $240,000.
At the end of 2015, Hersi purchased machinery at a cost of $1,000,000. Hersi paid $400,000
cash. The balance was financed by the seller at 8% interest.
Depreciation expense was $2,080,000 for the year ended 2015.
Calculate Hersi’s cash flow from investing activities for the year ended 2015.
A) $ 360,000 inflow.
B) $ 40,000 outflow.
C) $ 300,000 outflow.
83
20. When using the indirect method for computing cash flow from operating activities, a change in
accounts payable will require which of the following?
A) A negative (positive) adjustment to net income when accounts payable increases
(decreases).
B) A positive (negative) adjustment to net income when accounts payable increases (decreases).
C) A negative adjustment to net income regardless of whether accounts payable increases or
decreases.
21.
The difference between cash flow from operations (CFO) under the direct method and CFO under
the indirect method is:
A) balanced by an opposite difference in cash flow from investing.
B) disclosed as a reserve in the footnotes to the cash flow statement.
C) always equal to zero.
22. Victor’s Company has the following changes in its balance sheet accounts:
Net Sales
An increase in accounts receivable
A decrease in accounts payable
An increase in inventory
Sale of common stock
Repayment of debt
Depreciation
Net Income
Interest expense on debt
$500
20
40
30
100
10
2
100
5
The company’s cash flow from financing is:
A) $100.
B) $ 90.
C) -$10.
26.
When a business issues bonds at a discount, which of the following occurs?
A)
B)
C)
A revenue account increases and an asset account increases
An asset account increases and a liability account decreases
An asset account increases and a liability account increases
84
27. An analyst compiled the following information for Xiao, Inc. for the year ended
December 31, 2015:
Net income was $850,000.
Depreciation expense was $200,000.
Interest paid was $100,000.
Income taxes paid were $50,000.
Common stock was sold for $100,000.
Preferred stock (eight percent annual dividend) was sold at par value of $125,000.
Common stock dividends of $25,000 were paid.
Preferred stock dividends of $10,000 were paid.
Equipment with a book value of $50,000 was sold for $100,000.
Using the indirect method and assuming U.S. GAAP, what was Xiao Inc.’s cash flow from operations
(CFO) for the year ended December 31, 2015?
A) $1,050,000.
B) $1,015,000.
C) $1,000,000.
37.
Which of the following is least likely a cash flow in the calculation of cash flow from operations
under U.S. GAAP?
A) Interest income.
B) Dividends paid.
C) Dividends received.
Use the Problem Statement
40.
What was the Cash Flow from Operating Activities for the year?
A)
B)
C)
41.
What was the Cash Flow from (used by) Investing Activities for the year?
A)
B)
C)
42.
$ 215,000
$ 51,000
$ 49,000
$ 2,000
($75,000)
($80,000)
What was the Cash Flow from Financing Activities for the year?
A)
B)
C)
($ 10,000)
($ 16,000)
($ 15,000)
85
43.
The Supplemental Cash Flow section will include a statement:
A)
B)
C)
44.
describing the exchange of common stock for cash.
describing the exchange of common stock for equipment.
describing the exchange of cash for a note payable.
In the Supplemental Cash Flow section (Indirect method), how much will “Cash paid for
taxes” be?
A)
B)
C)
$ 37,000
$ 39,000
$ 38,000
86
87
Module 7
Managerial Element 1
temerity
Concentration comes out of
a combination of confidence
and hunger.
(Arnold Palmer)
We have been studying Financial Accounting
Which deals with ___________________________________________
Managerial accounting is __________________________________________________
Cost Behavior
We sell Thingamabobs. They cost $90 to make and sell for $ 300 each. Our only other expenses are
the rent of $300 per month, utilities of $100 per month and a $10 per unit sales commission we pay to
the salespeople. We sold ten during the year.
Fixed Costs are
Variable Costs are
Calculating Break-even
88
Target Profit
A Contribution Margin Statement
“ The art of conversation lies in listening. ” — Malcolm Forbes
89
Your Club is thinking about having a dinner. They expect to charge about $30 per head. They need to
rent a room in Baker for $300 (includes servers). In addition to the $300, Baker will charge you $10 per
dinner. How many dinners must you sell just to break even? How many dinners must you sell to make
a profit of $600?
Sarah sells cookies. She uses ingredients that cost $.20 per cookie and sells them for $.50 each. She
pays her sales force a 10% commission on all cookies sold. She pays rent of $1,000 per month. Her
other fixed costs are $2,000 per month. How many cookies must she sell to break-even? How many
cookies does she need to sell to make $2,000 per month? Prepare a contribution margin statement at
the level where she is making $2,000 per month.
Using the Contribution Margin%
90
Gracie Company sells Dodds. The following is an income statement for a recent month.
Sales
Cost of goods sold
Gross Margin
Operating Expenses
Salaries and commissions
Rent
Utilities
Other
Net Income
$250,000
150,000
100,000
$42,000
18,000
7,000
3,000
70,000
$30,000
Gracie sells one product, Dodds at $20 each. Cost of goods sold is variable. A 10% sales commission,
included in salaries and commissions, is the only other variable cost. Gracie tells you that the income
statement is not helpful, for she cannot determine such things as the break-even point.
Redo the statement using the contribution margin format.
What is the breakeven in units and dollars
91
Using the Contribution Margin%
Acme Company sells anvils and the following is per anvil
Unit Selling Price
Variable Costs
Total fixed costs
Total volume
$20
12
$ 400,000
100,000 units
Prepare an income statement using the contribution margin format
What is Acme’s Break Even point in units
In $
92
Now assume that Acme wants to make $1,000,000 per year. How many anvils does the company need
to sell to accomplish this (in units and dollars).
The CFO of Garven Company provides the following per-unit analysis, based on a volume of 100,000
units
Selling Price
Variable Costs
Fixed Costs
Total Costs
Profit per unit
$30
$12
9
21
$ 9
Answer each of the following questions independent of your answers to the other questions
1) What total profit does Garven expect to earn?
2) What would be the total profit at 110,000 units? (Be careful- they are fixed costs)
93
3) What is the break-even point in units?
4) Garven’s managers think they can increase volume to 120,000 units by spending an additional $
60,000 on salespeople. What total profit would they earn if they make this move?
5) Break-even using Contribution Margin %
94
Now go back to the Hot Dog Stand
You have decided to open a hot dog stand at the corner of Court and Union. The following is your
opening balance sheet. You own the only 50,000 shares of stock outstanding for your company. You
sell the dogs for $2.00 each. You pay your worker a fixed salary of $20,000 plus $.10 for each dog she
sells. (Dogs cost $.40 each- how do I know that?)
Assets
Cash
Inventory
Cart
Total
5,000
10,000
35,000
50,000
Liabilities
Owners’ Equity
Common Stock
50,000
Retained Earnings
Total
-050,000
Income Statement Using
Contribution Margin Format
For the First Year
Sales
Cost of Sales
Gross Margin
Operating Expenses
Wages
Other
Total Operating Expenses
Operating Income
60,000
12,000
48,000
Sales
Cost of Sales
120,000
24,000
23,000
10,000
33,000
15,000
How many hot dogs do you need to sell to break-even
Per Year
Per Month
Per Week
Per Day
Per Hour
95
Homework Managerial I (Module 7)
Problem 1. Salmon Company makes Things. Things sell for $30 each and cost $10 each to make.
Fixed costs are estimated to be $1,500,000 next year.
What is the breakeven point in units and sales dollars for Salmon based on the above information
How many Things must Salmon sell to make $1,200,000 next year?
Problem 2 Billy Bob’s has given you the following income statement for June 2015.
Sales
Cost of goods sold
Gross margin
Operating expenses:
Salaries and commissions
Utilities
Rent
Other
Total operating expenses
Income
$ 500,000
300,000
200,000
$ 80,000
20,000
22,000
18,000
140,000
60,000
Billy Bob sells one product, a running shoe for $100 per pair. A 10% sales commission, included in
Salaries and commissions is the only other variable cost. The manager tells you that this financial
statement is not very helpful to her.
Redo the income statement using the contribution margin format.
For Billy Bob’s determine the break-even in sales dollars and in units
96